Vienna, September 20th 2001

" The New Europe – Setting out towards a common future"The new Europe: the challenges of adjustment in the candidate countries

Ladies and Gentlemen,

The challenge of adjustment appears to be an unending one to the weary citizens of central and eastern Europe since the moment when more than ten years ago they decided to embark on a path of transition to democracy and market economy. Since that time they have been subjected to a continual stream of deep reforms, which have radically changed almost every aspect of their lives. The early, but continuing, reforms marked the transition in the political, economic and social areas from non-democratic planned economies in which they had lived for over 40 years. The second set of reforms, which are still in full swing, concern changes necessary to join the European Union as full members.

Fortunately these two sets of reforms are in general mutually reinforcing. But the changes required to join the Union go well beyond what would have been necessary simply to become democratic, market economy states.

The adjustments, which must be made, touch the fundamental political, economic and social structures of the candidate countries. In these countries, which have suffered from decades of institutional instability or regimes imposed from outside, the changes required to join the Union appear more dramatic than in settled democracies like Sweden or Austria. Of course citizens realise that the many of the adjustments which they are asked to make to join the EU would have to be made anyway at some time but this does not make them any easier.

The adjustment to the internal market itself is already a massive challenge. In joining the Union, the countries of central Europe are adapting to a very particular and very specific market economy system. Joining the internal market of the Union not only requires that the normal elements of the market economy such as price liberalisation and adequate competition policy are put in place, but also that specific EU standards are adopted throughout the economy.

Implementing the acquis is posing a significant problem for enterprises in the candidate countries, and especially for small and medium-sized enterprises, which do not have the resources to obtain all the information and advice, not to mention investment which they need. In several candidate countries, business organisations have protested at the speed with which government is implementing the acquis. Here the foreign companies which have invested in the candidate countries are playing a useful role, in forcing suppliers already to work to the same standards as their suppliers inside the Union. There will still be adjustment problems remaining even after accession, but the dynamic enterprises in the new Member States will overcome these problems.

More difficult for the candidates than technical adjustment to the internal market is however the adjustment in institutions, including the state institutions. While much has been done to modernise and improve the civil services of the candidate countries, they still in general appear weak. This is partly because of the absence or weakness of the middle management level to oversee and train the good young dynamic officials, who one finds in most ministries today. It is also because of the relatively poor level of pay, which state officials receive in most candidate countries. The weakness of the civil service is serious in a period of rapid adjustment and will be particularly so, when the candidates join the Union and have to manage Union as well as national business.

Of particular importance is further adjustment required in the legal system of many of the candidates, where cases take too long in general and where the training of lawyers and judges is still necessary, including in areas where EU law will apply. Many other institutions will also have to change their operations and resistance to change in established organisations is always strong. Many new institutions are being created and will have to be created but we all know how long it takes for new institutions to achieve credibility with the public.

This institutional weakness is a worry for both the European Union and the candidates because of the unique system of implementation of EU regulation in the Member States. This is why it was decided to devote a considerable part of EU financial assistance to improving the institutional preparation for accession. It can be disputed whether the approach taken is effective but it is clear that the candidate countries must themselves take the necessary measures to strengthen their institutions further in the coming decade.

In spite of these weaknesses, to judge by the last set of European Commission reports on the candidate countries, the adjustment to the EU acquis is going well in most of the candidate countries. It is simply not possible for the whole acquis to be applied perfectly at accession; in many member states after many years of membership this is also not the case. In a few areas there will also be transitional regimes beyond accession to complete the adjustment. But in general progress is good and preparation for accession in 2004 is on track.

The governments and parliaments of the candidate countries have considered the pain and the cost of this second adjustment and have decided that they can justify inflicting them on their citizens because the benefits of full accession to the Union far outweigh the costs. These benefits are not, in the main, financial benefits, but rather the benefits, which come from full integration into the largest area of stability and progress on the Continent and to which the candidate countries have always felt that they belonged. However governments will eventually have to prove to their citizens that this is the case, rather than just stating it as a truth.

It must be emphasized that all or almost all of the candidate countries have made fast progress in carrying out the necessary transition adjustments, even though they caused social pain. Throughout the region the average citizen is now considerably better off materially than was the case before 1989. But this improvement has accompanied growing inequalities of income and wealth, which have led some groups to feel that they have been disadvantaged by the reforms. These groups are unlikely to believe that continuing reform required to join the EU is going to remedy the situation.

Other professional and social groups have formed opinions about the value to them personally of the continuous adjustment process. Doctors and professional groups may indeed be strongly in favour, but workers in privileged sectors which are going to lose out in the integration process or, in some countries the farmers, who fear entry to the Common Agricultural Policy, will be against.

In some of the candidate countries, the degree of support for integration into the Union has slipped to worryingly low levels. In this situation it is absolutely necessary for the politicians to demonstrate the advantages of membership more clearly.

This is why the decision of the Union’s member states to impose a transition period on the free movement of labour has caused such annoyance amongst the candidate countries, even though in its implementation there seems a good chance that the transition period will not be rigidly adhered to by the majority of EU members. The ability to move freely and to work wherever one wishes is one of the fundamental freedoms which attract the candidates to membership. It is as much a symbol as a practical result of accession.

Another, further adjustment will be required of the candidate countries, an adjustment in their foreign policy with respect to European countries, which will not be joining the Union. This adjustment will be necessary as there will be the imposition of the full Schengen acquis on the new member states. I am sure that the New York and Washington tragedy adds a new dimension to this problem. It has been much discussed recently, especially in the context of Kaliningrad becoming a Russian exclave surrounded by Union member states.

This leads me to conclude with a few thoughts on the significance of enlargement for those countries which will not be joining the Union, but which are all members of the Economic Commission for Europe.

The former rather relaxed border regimes practised by most of the candidate countries vis-à-vis their neighbours have served several objectives. On the one hand they further regional peace and stability by fostering close relations with neighbouring countries, with which there are frequently close social or cultural relationships – Romania and Moldova, Poland and the Ukraine for instance. Secondly they foster economic growth in regions, which are often very poor, by stimulating local trade and cross-border business cooperation.

As the candidate countries implement the Union acquis, these relationships are likely to be ruptured or at best severely downgraded. Seeing these future problems, many of the non candidate Central and Eastern European countries have already concluded that enlargement will affect them negatively. I would argue that this is not necessarily true and that a strong case can be made that all will gain from the enlargement process, the Union, the candidates and their eastern neighbours.

Accession to the EU is expected to help the candidate countries to continue economic growth at a rate considerably above that of the Union itself. With investment in infra-structure also continuing at a high level over a decade or more, these countries will begin to close the development gap with the old EU members. The process of catch up within the enlarged Union, meaning growth and investment, will go along with lower tariffs in the new EU member states, as they apply the Common External Tariff of the Union. This means that enlargement should lead to higher exports from those countries outside the enlarged Union to the new EU member states. This means higher growth for them.

The already sometimes quite strong commercial contacts which exist between operators in the candidate countries and the non-EU neighbouring countries will also form a useful base in some cases for the latter to develop EU-wide business. While such developments depend on the entrepreneurial spirit of individual businessmen, the existence of an operation in one member state of the Union is a very useful bridgehead for developing business in the other member states.

As the accession of the candidate countries to the Union will increase the stability of the whole region, this will have a significant beneficial effect on the neighbouring countries. However, this effect obviously will depend on those countries running appropriate macro-economic policies and defending democratic principles. As long as this is the case, increased stability (and therefore lower specific country risk) will lead to higher foreign direct and domestic investment. With lower tariff barriers into the new member states and higher growth there too, investment and economic growth should rise in the neighbouring countries as a result of enlargement.

Other positive effects, in areas such as transport infrastructure and energy, could be added to the list of benefits coming from enlargement. But two aspects remain which I think need policy attention.

The first is that of the EU external frontier, which I have already mentioned and where I think some more imaginative work is needed to design frontier regimes, which connect the countries of Europe rather than dividing them.

The second more important is for the EU to consider more developed agreements with the neighbouring countries such as Russia, the Ukraine, Belarus and Moldova, which would go beyond the Partnership and Cooperation Agreements. The full success of this first eastward enlargement requires a new quality of relationship between the enlarged European Union and these European countries which are not joining the Union. There is ample room to speed up the liberalisation of trade and to encourage business cooperation between these European regions. But perhaps above all the level of political dialogue needs to be boosted to reduce political tensions on the Continent.

Ladies and Gentleman. As a Polish citizen I can be happy with the way we have tackled the massive adjustment problems associated with the political and economic transition and with the preparation of accession. I hope that the timetable for accession outlined at the Nice European Council can be respected. As Executive Secretary of the United Nations Economic Commission for Europe, I would also like to encourage all sides to think deeply about the development of relations between the new enlarged Union and those European countries which are not joining. It is certainly peace, stability and prosperity throughout the whole European Continent which is my hope for the future.